2020 Scenario: OPEC May Be Replaced

It's 2020, and the energy ministers of the Organization of Gas-Exporting Countries, known as OGEC, the umbrella for the dozen or so nations which dominate the market, gather in Madrid for their annual get-together to determine production quotas and price levels for the new primary energy source that fuels the global economy , natural gas, or more specifically, liquefied natural gas, known as LNG.

That scenario may seem somewhat fanciful right now, but the emergence of a partner, possibly even a successor, to the Organization of Petroleum Exporting Countries, OPEC, which has dominated the world"s energy market since the 1970s, is on the cards as the natural gas business, particularly the Gulf-based LNG sector, is set to expand into a global boom with the US as the dominant market. The worldwide shift toward LNG will bring in its wake profound political and economic changes in many parts of the world, providing a lifeline for the economies of some Gulf states whose oil production is sliding into decline as fields are exhausted. "The international trade in gas delivered by pipeline and tanker, will rival the scale and complexity of today's petroleum market," said Edmund O"Sullivan, editor-in- chief of the Middle East Economic Digest."The world gas price will then become as important to Middle East economies as the world oil price.

Logic suggests that exporters will want to coordinate strategies to prevent a gas price collapse. Whisper it those who dare: an OPEC for gas may soon be on the world energy agenda," he added. In December, some of OPEC's most important member states shifted their attention from crude oil to LNG exports at a conference convened by the administration of the US President George W. Bush to boost US imports of the refrigerated fuel. The United States is without doubt the key market for LNG, currently accounting for one-quarter of the natural gas consumed in the world every day. The Americans are increasingly concerned about the security of their energy supplies, and have long sought to undermine OPEC's influence in the oil market. While OPEC largely controls global oil supplies and prices, the Bush administration would like to see competition blossom among LNG exporters. Non-OPEC producers like Russia, Norway, Trinidad, Australia and Oman, are looking at LNG exports to generate new revenue. "It's in our interest to develop as many international sources as possible" for US imports of LNG, US Energy Secretary, Spencer Abraham, said at the conference in Washington. "LNG is clearly going to be a large factor in the world's future energy equation," he said.

The first commercial LNG project was launched in the mid-1960s, with modest sales by Algeria to Britain and France. After the 1973 oil crisis, LNG got a major boost, particularly from Japan, which wanted to drastically reduce its dependence on Middle Eastern oil. In September, the US Department of Energy predicted that LNG would account for 15 per cent of US gas consumption by 2025, compared to 1 per cent in 2002. US demand for natural gas is projected to grow by 23 per cent over the same period, and the forecasts for Europe and Asia are just as striking. Gas provides about one-quarter of the total energy for the US economy. In Europe, the figure is 20 per cent and rising, mostly with gas piped from Russia, which has 30 per cent of the world's known reserves and probably a lot more under the frozen and largely unexplored north. Qatar and Iran share another 25 per cent in the vast North Field/South Pars field in the southern Gulf. Next comes Saudi Arabia and the United Arab Emirates with sizeable reserves. For the UAE, with 212 trillion cubic feet of gas, mostly in Abu Dhabi, the gas fields will fill the economic gap left by the emirates' declining oil fields. Even Oman, whose modest oil production is also in the decline, has used LNG exports , worth some $1.2 billion in 2002 , to offset falling oil revenue. Daniel Yergin, author of the definitive book on the oil business, The Prize: The Epic Quest for Oil, Money and Power, published in 1991, calls the emerging LNG market "The Next Prize."

In a recent article in Foreign Affairs, Yergin, chairman of the Cambridge Energy Research Associates, a leading energy consultancy, and his colleague, Michael Stoppard, the group's director of global LNG, argue that the natural gas industry "will have a far-reaching impact on the world economy, bringing new opportunities and risks, new interdependencies and geo-political alignments. Some analysts anticipate that the new interests and interdependencies brought by the LNG trade, will bolster relations between producing and consuming countries. Others, however, worry that it will only lead to dependence on imports for yet another key commodity, which will create vulnerability to deliberate machinations, political upheavals, or economic problems."

In a world as uncertain as the one we live in today, with the potential for widespread political and economic upheaval in the Middle East, the Caucasus, Central Asia, West Africa and Central America, established and emerging sources of energy, such concerns carry some weight. "One can well envision scenarios in which the future large LNG exports could be subject to some kind of interruption, even if only short lived," Yergin and Stoppard said, adding that the "best response to such security concerns is to develop the global LNG business and ensure that ample supplies come from many countries. Encouraging LNG projects in various countries is a safeguard against undue dependence on too few nations. "LNG is natural gas cooled down to

-162C, at which temperature it contracts into a liquid, which can be carried in tankers and delivered around the world, anywhere there are re-gasification terminals. These turn the liquid back into gaseous form for industrial use, feeding it into pipelines for distribution. Liquefication allows a vast amount of the gas to be transported in a single cargo. Methane, for instance, is 600 times less voluminous as a liquid than as a gas, so one shipment by an ultra-large tanker is the equivalent of 5 per cent of the gas consumed in the US on an average day. LNG and other gas-to-liquid (GTL) fuels, transported by sea, allow producers to bypass the pipeline constraints that have traditionally tied natural gas within regional markets and provide an immense boost to globalize some of the trade in world gas production that currently amounts to nearly 90 trillion cubic feet a year.

Gas is an attractive alternative to oil or coal for another reason - the environment. Gas is the cleanest burning of the fossil fuels and is finding increasing favour globally in the struggle against the harmful emissions of greenhouse gases. Over the last 20 years, natural gas consumption has grown by more than 50 per cent and is now the primary choice for power generation. More than half of the power stations operating around the world are gas-fired. The constantly rising demand for electricity around the world has spurred the expansion of the LNG industry, especially in the United States. There, more than 200,000 megawatts of new generating capacity , a huge amount equivalent to one-quarter of the entire US capacity in 2000 , is being constructed or is scheduled to become operational soon. It's the same elsewhere, with many large power projects underway or planned in the Gulf region. Indonesia is now the world's biggest LNG exporter, supplying some 30 million tons a year to major buyers that include Japan and South Korea.

But Qatar, which has by conservative estimate, gas reserves of 900 trillion cubic feet, the third largest after Russia and Iran, is planning to take the lead within the next few years. "The state of Qatar, which constructed its first gas liquefying plant in 1996, aimed for a production capacity of 60 million tons of liquefied gas by the start of the next decade," Energy Minister, Abdullah bin Hamad al-Attiyah boasted in December. In October, the tiny emirate signed natural gas mega deals with ExxonMobil and Shell worth $17 billion, including the supply of 15.6 million tons a year of LNG to the US for 25 years from 2008-09. On December 8, Attiyah signed a memorandum of understanding with another US energy giant, ConocoPhilips, that involves the construction of a gas liquefying plant with an initial production capacity of 80,000 barrels a day of fuel products such as petroleum gas and naphtha, used as feedstock for the chemical industry. Production capacity is slated to increase in the final phase of the $5 billion project. At the same time, state-run Qatar Petroleum, headed by Attiyah, and the South African minerals and hydrocarbons group, Sasol initiated work on a $1 billion GTL joint venture in the emirate.Qatar's burgeoning gas industry centers on two companies, Qatargas and the Ras Laffan Liquefied Natural Gas Co., known as Rafgas. Qatargas is set to produce some 32 million tons of LNG a year by 2010.

Its operations, which involve ExxonMobil, ConocoPhilips and France's Total among others, will ship products to Japan, Spain, Britain and the US. The company is currently looking to Europe and the US for more deals. Rafgas is set to produce 36.6 million tons of LNG per year by the end of the decade. Qatar Petroleum is the main owner, with ExxonMobil taking just under one-third of the venture. Its three projects will supply LNG to South Korea, Spain, Italy, India, Taiwan and the United States. But Qatar's ambitious plans and those of other gas producers to globalize the industry, will require huge investment, around $200 billion in the next decade, according to most estimates. Much of this will involve the construction of many more regasification terminals. Environmental groups have opposed plans for these because of the potential for explosions, either accidental or the result of terrorist sabotage in the plants themselves or the tankers that transport the LNG.

"A serious incident in the United States and the whole thing would shut down," said Doug Rotenberg, British Petroleum's president for global LNG, adding that "it would be devastating." There are only 40 regasification plants in the world, spread among 10 countries, with around 20 in Japan and four in the US. Spain, strategically located relatively close to natural gas sources in the Gulf and North Africa, is one of the biggest LNG buyers , 21 billion cubic meters consumed in 2002 alone.

The gas comes from as far afield as Australia and Trinidad, but Algeria supplies 60 per cent, followed by Nigeria, Norway and the Gulf states. Spain has four terminals in operation, with two more in the works, the highest number of any European country along with 4,000 kilometers of gas pipeline criss-crossing the country. No new terminals have been built in the US for two decades, but applications to construct 30 more have been made. Whether these plants are built or not, will have a critical impact on LNG's expansion. ExxonMobil has announced plans to build a $600 million plant on the Texas coast to take in Qatari LNG and wants to build three more around the US. Royal Dutch/Shell and BP are among other companies driving to build new terminals in California, Texas, Alabama, Florida, Mexico, Nova Scotia and other locations.

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